Trading strategy “Investing in PAMM accounts”

Today we will generally look at the advantages and disadvantages of trading cryptocurrency using the “Investment in PAMM Accounts” strategy.

In previous reviews, we briefly touched on two investment strategies “Buy and Hold” and “Portfolio Investments”.

Investing in PAMM accounts is a strategy that was first used by Alpari in the FOREX market and, subsequently, migrated to the cryptocurrency market. Now many Forex brokers who have introduced the opportunity to trade cryptocurrency offer to use this tool to generate income. Let's consider the advantages and disadvantages of this method.

The name "PAMM" is an English abbreviation - PAMM (Percent Allocation Management Module) - Percentage Profit Distribution Management Module. 

The principle of a PAMM account is that the Investor makes a deposit into the Manager's account to trade the total amount of the PAMM account. The profit received, over a set period of time, is distributed between investors and the manager, in proportion to the volume of contribution of each participant.

A simplified understanding of the operation of a PAMM account can be made from a typical picture, which is often present on the websites of brokers that provide such a tool.

The main and main advantage of using such an investment strategy is that anyone can invest in cryptocurrency, even without experience of trading on the stock exchange, and they can receive interest income from their investments from part of the income of an experienced cryptocurrency trader. 

The technology of investing in PAMM accounts has been tested for a long time and includes many mechanisms for protecting the interests of the investor. 

Why is it profitable:

- The manager trades at the expense of his own funds and investors’ funds, so he is maximally interested in profitable trading;

- Investments in PAMM accounts are safe. This refers to “non-trading risks”. The deposit cannot be withdrawn from the account at the request of the Manager;

- Investors have the opportunity to study the trading history of any Manager and select a suitable PAMM account that would best meet the expected results from investments;

- Often, to protect Investors, the broker has implemented a special loss limitation mechanism. Works approximately the same as Stop Loss when trading on the stock exchange.. 

However, there are serious drawbacks:

- A significant drawback when investing in PAMM accounts is large drawdowns in the account's profitability. There is a possibility that the trading strategy may turn out to be unprofitable and the investor may lose his contribution to the PAMM account. However, this is very unlikely if you carefully select a highly qualified Manager who always takes into account “trading risks”;

- For maximum efficiency, investments in PAMM accounts must be carried out adhering to a certain strategy, analyzing periods of maximum profitability and drawdown;

- To diversify risks, it is better to select a portfolio of PAMM accounts of different Managers.   

- Certain skills and time are required to analyze information on a PAMM account and select a Manager.

We can conclude that with the arrival of PAMM accounts from Forex to the crypto market, all the shortcomings of such an instrument migrated here along with this investment strategy. Crypto exchanges often use a strategy for guaranteed receipt of passive income in the form of lending, which we wrote about earlier in our article "Features of margin trading in cryptocurrency"